American Household Debt Components 1989 - 2014 : Mostly Housing

One of the points made in the Survey of Consumer Finances for 2013 report Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances (PDF) is that debt levels are down in 2013 from 2010.   Thats good.    I decided to look closer at the figures for debts in the SCF.


The Survey of Consumer Finances Table 16. has data showing the composition of debt in the USA.   Here's a graphic of those %' distributions of our nations families debts :

(click image for full size)

Immediately obvious is how much the debt for primary home loan mortgages overshadows all other forms of debt combined.    70% of our debt is home mortgages and another 12% is a combination of home equity loans and other residential loans (presumably rentals and/or vacation homes?). 

I'd also like to point out how this chart illustrates the horrible looming disaster that student loans pose to American families.    What you can't see how awful the student loan bubble has become?   Well yeah I guess it is kind of hard to see compared to that giant blue bar for home mortgages.   Isn't it?   Well the education debt level has gone up considerably in the past 20 years, no doubt about that.   As of 2013 the education debt accounted for 6.6% of American debt and back in 1989 it was just 2.4%.    On the other hand in 2013 vehicle loans are only 5.1% of our debt and in 1989 they were 10.6%.   Hmmm.    I guess I don't think thats bad that we've decided to pay for educations instead of new cars... but I suppose thats a personal opiniony kind of thing.


To get a better look at how the debt distribution looks, I'll show the figures excluding loans on primary residences :

(click for full size)

Its a bit easier to see the growth of the light blue education debt bar there.   But its still not really standing out much versus the other forms of debt. 
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Credit Card Debt Levels 1989 to 2013

Here's a bright side in the Survey of Consumer Finances from 2013:   Credit card debt levels are down and fewer families hold credit card debt.

 Here's a chart showing the percent of households that have credit card debt and the mean debt for families with credit card debt:

(click image for full size)

I got the figures from Table 13 out of the SCF historic tables.

Here's a table of the figures I pulled from the SCF :

	% with debt	mean debt
1989	39.70%	$   1,800
1992	43.70%	$   2,300
1995	47.30%	$   3,000
1998	44.10%	$   4,100
2001	44.40%	$   4,100
2004	46.20%	$   5,100
2007	46.10%	$   7,300
2010	39.40%	$   7,100
2013	38.10%	$   5,700

So in the 3 hears from 2010 to 2013 the average debt dropped $1400 and 1.3% fewer families  have any credit card debts.   Good job America.


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Do You Have to Repay a 401k Loan Immediately If You Lose Your Job or Quit?

One of the commonly cited problems with 401k loans is that if you end your job at the company then you'll have to pay back the loan in full.    That could be a real big problem if you're laid off unexpectedly and then presented with a bill to pay off a sizable loan at the same time.  

But is this rule mandatory?   Well no.  Its not really a rule in general. 

My employer does NOT require us to repay 401k loans after ending your job.  

There isn't anything that I can find in the 401k laws or rules that actually says this is a rule.  So its just up to the employer policies.     I am guessing that most employers do require 401k loans to be repaid when the job ends.   I say that given how almost everyone states this policy as if its a general rule.  However I don't have any information on how prevalent this rule is so I am just saying that based on assumption.  

To know if 401k loans from your plan are required to be paid in full when the employment ends the only way to know is to check with the 401k plan administrator or documentation.

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How Fast is a Mortgage Normally Paid Down?

We've got a couple mortgages that we only recently got within the past few years.    The mortgages are both 30 year notes and so I'll still owe on them when I'm in my 60's and past retirement age.   I was curious how much I'd owe on the mortgages so I used the calculator at Mortgagecalculator.org to generate amortization tables.   

One might assume that when you're 15 years into a 30 year mortgage that you'd have it half paid down.  But thats not now it works.   Mortgages payments are mostly interest at the start and little principal is paid initially.   Then as the principal gradually wears down over the years when you get to the end of the original term the opposite is true and most of your payments are principal and (relatively) little interest is paid.

You can see the data below but roughly speaking, for a 4% loan you've paid down just 10% in the first 6 years, 20% in 10 years, 1/3 is paid off by 15 year point and 50% is paid off in 20 years then by the 24th year you've paid down 2/3.

I'm measuring the amounts in the % of original loan that is still owed.    So in the 1st year you still owe nearly all of the loan so its 99-100% (rounded).     I'm assuming the normal amortization repayment rate here and if you paid extra principal into the loan at any point that would accelerate the repayment and change the curve.

The 30 year mortgage pay off rates are shown in graphic form :

Here's a table for a 30 year mortgage at varying interest rates :

Year	4%	5%	6%	7%	8%
1	99%	100%	100%	100%	100%
2	98%	98%	98%	99%	99%
3	96%	96%	97%	98%	98%
4	94%	95%	96%	96%	97%
5	92%	93%	94%	95%	96%
6	90%	91%	93%	94%	95%
7	88%	89%	91%	92%	93%
8	85%	87%	89%	91%	92%
9	83%	85%	87%	89%	91%
10	80%	83%	85%	87%	89%
11	78%	81%	83%	85%	87%
12	75%	78%	81%	83%	85%
13	72%	75%	78%	81%	83%
14	70%	73%	76%	78%	81%
15	67%	70%	73%	76%	79%
16	63%	67%	70%	73%	76%
17	60%	64%	67%	70%	73%
18	57%	60%	64%	67%	70%
19	53%	57%	60%	64%	67%
20	50%	53%	57%	60%	63%
21	46%	49%	53%	56%	59%
22	42%	45%	49%	52%	55%
23	38%	41%	44%	47%	50%
24	33%	36%	39%	42%	45%
25	29%	32%	34%	37%	40%
26	24%	27%	29%	32%	34%
27	20%	22%	24%	26%	28%
28	14%	16%	18%	19%	21%
29	9%	10%	11%	13%	14%
30	4%	4%	5%	5%	6%
31	0%	0%	0%	0%	0%

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Distribution of Student Loan Balances

The Federal Reserve Bank of New York published a  Student Debt Overview and on page 10 they have a chart of the distribution of student loan balances.   The numbers are a couple years old now and probably grown a bit since then but not drastically.

Note that the chart includes all borrowers including people who went to grad school and professional school like law school and med school.   So the larger balances are going to be mostly people with professional degrees like lawyers and doctors and there are much fewer people with just a bachelors degree who have 6 figure debts.

Here's a chart :

source : FRBNY Consumer Credit Panel / Equifax

And a table :

Debt balance	%
below $10,000	39.90%
$10,000-$24,999	29.80%
$25,000-$49,999	17.70%
$50,000-$99,999	9.00%
$100,000-$149,999	2.20%
$150,000-$199,000	0.90%
$200,000+	0.60%

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Refinance Student Loans with Sofi.com

If you have student loans then its likely you're paying 6.8% or more in many cases.

Social Finance or  Sofi.com is one option to refinance your student loans.

They advertise variable rates starting at 2.66% and fixed rates starting at 3.625%.    That will beat a lot of peoples current student loan rates.   However the rates are based on your credit and  profile so it could be higher.   They cite maximum rates of 5.285% variable or 7.740% fixed which are still better than a lot of private loans.

But it won't work for everyone.   They only loan to students from certain schools and you do have to have decent credit.   You also must be employed or have a current job offer.   And you must currently reside in one of the eligible states.   Their list is most states but its NOT available in Alabama, Delaware, Idaho, Mississippi, Montana, Nevada, North Dakota.   I have not been able to find specifics of the criteria like credit score or a list of schools on the Sofi website itself. 


Sofi says you must be a graduate of "a selection of Title IV accredited universities or graduate programs".  Thats not specific at all.   I found one reference to them lending to grads of about 100 schools but that was about a year ago and they may have expanded the number.   I found a list of eligible schools at a 3rd party site, but I don't know if its current or accurate.  The list of schools looks legit though but again it may be out of date.   Since Sofi's model has been to deal with schools that have low default rates so you could generalize that only the better schools are likely to be covered    (sorry University of Phoenix grads).   You can look up default rates by school at this site and if your school is very higher then they may not be covered or you may be offered a higher interest loan.

Note I don't have any specific information on how Sofi decides to approve loans or determine rates. 
I'm inferring some from descriptions of their business model mostly.  

The downside to doing a refinance is that you lose access to programs like the government IBR and loan forgiveness.  So thats something to consider.     You might not get great terms from Sofi either.  I've read reports of people with credit scores in the high 700's and good paying jobs getting offers of 6% loans, which isn't all that great.

But if you do have high interest student loans then looking into Sofi.com might be worth your while.

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Is it Really That Hard To Get Rid of Student Loan Debt in Bankruptcy?

This is a fairly short article that mostly serves to point you to the article :

Bankrupt? How to get student loan debt erased

We've been told for a while that it is almost impossible to get rid of student loans during bankruptcy.   Thats kind of true.   You can't discharge student loans in a normal bankruptcy and you have to file an "adversarial proceeding" which is a big deal and expensive to do.

But as the article points out  about 2/5 of the people who try this path are successful.

"In one study of 170,000 student loan debtors who filed for bankruptcy protection in 2007, only 51 won full discharges of their debt and 30 received partial discharges.
The author of the study, which was published in the American Bankruptcy Law Journal, found that only 213 of the student loan debtors studied even tried to have their education debt discharged ..."

While virtually nobody succeded, thats moslty beause hardly anyone tried.

If you can get legal help or represent yourself then it seems the chances of getting loans discharged aren't all that awful and certainly not as bad as has been claimed.

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There Will Be NO Student Loan Bailout

No.  Its not going to happen.   Stop expecting it.   Whatever you do .... DON'T make financial plans around it.   There is not going to be a student loan bailout.   I thought this story had died out months ago but just recently I saw someone still talking about the prospect for a bailout of student loan debts. 

The government isn't going to just write off over $1.2 Trillion in debts because some people would benefit.  There are many people who do struggle to repay student loans, this is true.   But most people are certainly willing and financially able to pay their loans back.     In either case we can't expect free money to come from the government any time soon.   Honestly a student loan bailout is just a misguided pipe dream.


The bigger reason that there isn't going to be a bailout is that we've already had bailouts.    For people struggling with their student loan debts there are already government programs to help them and get at least partial forgiveness of the debts.

There is the new Pay As You Earn Repayment Plan  which has 20 year forgiveness.   Which is added to the existing Income-Based Repayment Plan (IBR) which includes 25 year forgiveness plan.   And if you go into public service then there is the  Public Service Loan Forgiveness  which has 10 year loan forgiveness.    These programs aren't simple blanket loan forgiveness for the entire nation as some people delusionally expect but they are certainly a very big helping hand for those who really need it.


I know that student loans are a burden to many people who have high debt levels and lower paying jobs.  But thats what the income based and pay as you earn repayment plans are setup to help with.   Now unfortunately those plans do not work with private lenders and many of the people in the worst situations are burdened with high private loan debts.  I don't expect any major changes or aid for people with large private loan debts.    Personally I think it would be a good step if they would force private lenders to all offer a income based system at least.  As it is you can't get rid of student loans in bankruptcy so you're stuck with the private loans for life, and I don't see what harm income based system would do there.

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Total US Auto Loan Debt From 1943 to 2013, real, nominal and % of GDP

Haven't you always wanted to know how much the citizens of the USA owed in auto loan debts in 1978?   Well today's your lucky day!   The answer is approximately $83.5 billion. Can't get enough of historical debt figures?   Well then read on!

I got the data off the Federal Reserve site : Consumer Credit - G.19 - memo - historical data
The inflation data is from the BLS CPI.   To make it a little simpler I just pulled out data for January of each year.    I assume that there aren't any major changes month to month really and if so they're likely seasonal in nature.

Here's the graphic :

(click image for full size)

Our auto loan debt has gone up pretty steadily over the past 70 years.    Even when adjusted for inflation the values have climbed pretty quickly.

In hindsight it seems pretty clear that the "Great Auto Loan Bubble"burst in 2005.   I mean just look at that red line up there!   pop!    I'm glad we all made it through that one.

I think its also always good to look at large financial figures like this as they relate to GDP.   So I got the US historical GDP figures from the BEA and plotted auto loan as % of GDP below.

There the change is less drastic as we bought more cars as our economy grew.  But still auto loan balances grew over the decades.   In the 1950's we were around 3% and then it peaked in now we're just at 4.9%.

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State Specific Student Loan Programs

Some states have their own student loan programs.   These student loans seem generally meant to act as an alternative to private loans and offer better rates and terms.     On the College Scholarships site I found a page on student loans for each state.    For each state I looked for a state specific loan program and found the 11 states below.   The interest rates may or may not depend on things like credit scores and that kind of thing varies depending on the program.    As you can see most of the interest rates are reasonable if not fairly generous.

Here is the list of states with a link to the program and the going rates:

State	program	interest	term
Alaska	ASEL	7.30%	fixed
Connecticut	CHESLA	5.99%	fixed
Kentucky	KHESLC	up to 7.59%	fixed
Massachusetts	MNIL	0%	fixed
Massachusetts	MEFA	up to 8.68%	fixed
Minnesota	SELF	6.90%	fixed
Minnesota	SELF	3.30%	variable
New Jersey	NJCLASS	5.49-8.05%	fixed
North Dakota	DEAL	5.93%	fixed
Rhode Island	RISLA	5.39-7.49%	fixed
South Carolina	PAL	6.75%-8.75%	fixed
Texas	HHLOans	5.25%	fixed
Vermont	VSAC	5.6%-5.9%	fixed

Of course the terms are subject to change so you'll want to check your state program for the current rate.    Some states also have loan and loan forgiveness programs specific to certain fields of study like health care or teaching and I did not list those here.

If you're in one of these states then I'd certainly look into the state  student loan program if you need to borrow for college.   While the programs aren't necessarily better than the federal Stafford loans they are almost certainly better than private loans.

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Student Loan IBR Can Cost You More In the End

Income Based Repayment (IBR) for student loans can be a helpful relief for many student loan borrowers.   If you have a significant amount of debt and your pay is relatively low then it can be a challenge to make your student loan payments along with paying all your other bills.   IBR lets you make a reduced payment based on your income level relative to your loan balance.  On top of that if you make IBR payments for 25 years then your loan balance can be forgiven. 

But IBR isn't always best for you financially.   One big gotcha about the IBR is that your future income is likely to increase and your future payments will be higher.  THis effect can have a gradual accumulating impact that raises your IBR payments.   Plus if you're making IBR payments for 25 years this extends your loan repayment over many more years past the standard 10 year repayment term.

Lets say you've got $50,000 in loans at 6.8% and you currently make $30,000 a year income.

With normal repayment terms you'd pay $575 a month for 10 years.  Your total payments would be $69,048 with $19,048 of interest.   If you went with the extended 25 year term under full payments you'd have a $347 monthly payment resulting in $104,108 total payments and $54,108 in interest.

If you sign up for IBR you would start with a $160 monthly payment.  Thats based on a single person making $30,000 income and no dependents.   Doesn't seem like a bad deal.   Now next year lets assume that you get a 3% income increase and then end up making $30,900.  For that next year your IBR payment would increase to $170 a month.  Then in the 3rd year another 3% raise would result in income of $31,827 and payments of $180.   And so forth over the years as your income goes up your payments would go up as well.   If you got 3% annual raises for 25 years then you'd end up with income of $60,984 and loan payments of $550.    Using this assumption of 3% annual raises your total IBR payments would end up $99,240.   This is still a little cheaper than the $104,108 you'd make with the normal 25 year payments but not by much.  

Now also with IBR at the end of 25 years you'd also qualify for forgiveness of the loan.   Because your payments were relatively low most of those 25 years you would actually accumulate principal for many years since you aren't paying enough to cover the interest.   During the first 3 years of IBR the government will waive any interest that your payments don't cover.   But after those 3 years interest starts to accumulate and can increase your principal.   At the end of 25 years in this example I figure you'd still owe about $43,000 on the loan.   That amount will be forgiven BUT another big gotcha with IBR is that you may owe income taxes on that forgiven balance.   If you're in the 15% tax bracket then taxes on $43,000 would equal $6,471.   If you end up in a higher bracket of course it would be even more.

Comparing the total payments and NPV of the different options I get :

	total	NPV
10 year	$69,000	$55,965
25 year	$104,100	$65,050
IBR	$105,711	$58,409

So the IBR doesn't really come out ahead financially compared to the normal 10 year repayment plan given my example.

Now this isn't to say that IBR is a 'bad deal' or that you shouldn't sign up for it.   On the contrary if you're only making $30,000 a year and facing $575 payments I'd certainly go for the $160 payment for IBR instead.  

My point is more to say that IBR isn't necessarily a 'free lunch'.  

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Colleges With the Highest and Lowest Student Loan Default Rates

Little while back DQYDJ mentioned in an article that 30% of people in repayment on their student loans are in default.  That number was shockingly high to me.   I'm still puzzled why its so high.   But anyway after reading that I was looking into default rates on student loans and I came across a page on the Dept. of Education site that lists the student loan default rate by university.   The data they have is from 2011 and looked at 2008 so its a bit out of date.   Unfortunately the default rates have apparently gone up significantly since '08.

I thought it would be interesting to see the list of schools with the highest and lowest default rates and so here they are.    I filtered the list to only look at schools with at least 100 students.   I noticed a few schools with the worst rates only had 1-4 students listed so that threw things off.

You can draw your own conclusions about what high or low default rates mean.   


First he bad news, schools with the highest default rates.

These are the FY 2008 two year cohort default rates with at least 100 students: .

School	State	Default
Academy Of Healing Arts	NV	46.89
Everest Institute	TX	35.28
Tucson College	AZ	34.65
Aviation Institute Of Maintenance	IN	32.52
Everest College	CA	31.17
Lamson College	AZ	30.48
Pennsylvania School Of Business	PA	30.09
Centro De Estudios Multidisciplinarios	PR	29.57
Talladega College	AL	29.41
Wyotech	FL	29.20
California Healing Arts College	CA	28.71
Institute For Business & Technology	CA	28.33
Plaza College	NY	28.06
Institute Of Technology	CA	28.01
Everest Institute	FL	27.62
Everest College	MO	27.56
College Of Office Technology (The)	IL	27.38
Career Institute Of Health And Technology	NY	26.88
Lincoln College Of Technology	TX	26.34
Everest College	CO	26.24
West Hills Community College	CA	25.97
Dudley Nwani The School	TN	25.93
Kaplan Career Institute	OH	25.76
Everest Institute	NY	25.71
Newbridge College - San Diego East	CA	25.68
Ntma Training Centers Of Southern California	CA	25.48
Everest College	WA	25.27
Prism Career Institute	PA	25.00

Most of the schools are for profit trade schools.  I see one school there that is obviously public, the West Hills Community College.   Everything else there looks like a for profit school.   Oh and "Institute of Technology" in California should not be confused with the California Institute of Technology.

Why do these schools have such high default rates?    I don't know.   One reasonable guess might be that they do not adequately prepare their students for the job market and thus present a poor educational value.   But thats just one theory.  I suppose there could be other potential reasons.

Now the Good news, the schools with ZERO defaults

There are a full 39 schools in the list with at least 100 borrowers and absolutely 0 defaults.   Those schools are :

Albany College Of Pharmacy And Health Sciences

Albany Medical College

Amherst College

Award Beauty School

Barnard College

Carleton College

Carroll College

College Of Saint Benedict

Concordia Seminary

Connecticut College

Davidson College

Eastern Virginia Medical School

Edward Via Virginia College Of Osteopathic Medicine

Erskine College

Haverford College

Illinois College Of Optometry

Kalamazoo College

Kansas City University Of Medicine And Biosciences

Lancaster General College Of Nursing And Health Sciences

Luther Seminary

Mayo Clinic, College Of Medicine

Medcentral College Of Nursing

Medical College Of Wisconsin

Muhlenberg College

Nebraska Methodist College Of Nursing & Allied Health

New England College Of Optometry (The)

Ross University School Of Veterinary Medicine

Saint Mary'S College

Southern California College Of Optometry

St. John'S College

Thunderbird School Of Global Management

Tui University

University Of London - London School Of Economics & Political Sci

University Of Massachusetts Medical Center

Vermont Law School

West Coast University

Williams College

Wisconsin Lutheran College

Wofford College

I don't recognize most of these but I do see several medical schools on that list.

Now this doesn't mean you should rush out and enroll in one of the 39 schools listed above without defaults.  I have no idea why their students haven't defaulted. 

I was curious and looked up my own alma matters and found that one was just a bit over 1% and the other was a little over 5%.   I wasn't surprised by either.

Whats the default rate for your school?   Is it a surprise?

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Debt Trends Among Younger Households for 1989 to 2010

I remembered reading somewhere that Millennials didn't own cars as much as older generations.   Theres been a few stories on that topic such as The young and the carless which says : "Nationally, the average annual number of vehicle-miles traveled by people ages 16 to 34 dropped 23 percent, to 7,900 from 10,300, between 2001 and 2009".    Then the article Young Americans ditch the car says that "The share of new cars purchased by those aged 18-34 dropped 30% in the last five years"

Given that trend away from cars for young people, I wondered to myself if Millennial were trading auto debt for student loan debt.

The 2010 Survey of Consumer Finances  (SCF)  I pulled the version that is adjusted for 2010 dollars so these numbers are all inflation adjusted.   I only looked at families with a head of household that was under 35 years old.   Thats the youngest family group that the SCF splits up. 

First, the % of families that have each type of debt in question  :

I looked at 4 types of debt.   'ed' is educational or student loans.   'auto' is automobile loans.   'other' would be other types of installment debt. I'm not sure what all falls in that 'other' category but I bet things like medical debt or boat loans.    Then 'cc%' is the credit card debt.

You can see there that the % of families with car loans did drop steeply from 2007 to 2010 and it went from 44% to 32%.    At the same time the % of families with student loans went up from 34% to 40%.      There was an almost equal % of families that dropped auto loans but gained student loans.

Now lets look at the amount of debt for families who owe the different kinds debt:

Again we see the trend that auto debt was down some from 2007 to 2010 while student loan increased.   Auto debt dropped $2000 from $14,600 to $12,600 and student loans were up $1,100 from $24800 to $25900.    Even among families with each debt we see student loans going up and auto loans going down.  However we also see credit cards go down and other loans go up. 

Finally I figured the total average debt for all families with head under age 35.   This combines the % of families with the debt and the amount of debt to find the average debt for all families whether each  family does or doesn't have debt.

Again we can see the trend from 2007 to 2010 is an increase in student loans and a decrease in auto loans.  Student debt went up by $2,004 and auto loans dropped by $2,411.    Credit card debt also dropped going down $955 but other loans were up 482.   The total average debt did drop from 2007 to 2010.  

Before we read too much into this I should point out that the debt balances were down among households in general from 2007 to 2010 regardless of the age of household head.   So the fact that auto loans dropped for young families is not unique and more a reflection of the poor economy and tight credit.  Auto buying plunged pretty drastically around 2008 and 2009 as the economy plunged into recession.  

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Which Debt Should You Pay off First?

I recently saw someone asking what debts they should tackle first.   When you are deciding which order to pay off debts you should generally pay off the highest interest rate debts first.   But not all debts are created equally even if the interest is the same.    Some debts are worse to carry due to their nature and there are other concerns than just the interest rate.

Below I  list what I think are the priority order of debts you should repay in general.  I start listing the worst kinds of debts and then move on to the lower priority debts.   This is not meant to be any kind of hard fast rule or anything since every situation is different in various ways.   This list of debt priority is more a generalization and there will be exceptions.

Here are what I think are the priorities for repaying debts :

Worst kinds of debts :
Loan sharks -  This item is mostly tongue in cheek as I would hope you don't borrow money money from the type of people who would break your knee caps.   But in case you do owe money to any criminal types its a good idea to pay that back and not borrow from them again.
Court judgements or fines - Any time a court tells you to do something its in your best interest to do what they said.  We don't have debtors prisons in the US but courts still have a lot of power to punish you for not obeying them, even if its dealing with with just paying parking ticket or a debt judgement.

Payday loans - Payday loans, car title loans or any other short term debt will generally have the worst interest rate terms. 
Pawn shops - While they may be a bit cheaper interest than payday loans the pawn shop loans generally carry collateral and you can lose your property if you don't repay within the terms of the loan.
IRS Tax debts - The worst thing about tax debts to the government is the power that the government has to collect the money.   If you do owe the government taxes then you should work with them to setup repayment terms.    The IRS isn't the worst lender out there and their terms are often better than you'd think. 

State or local tax debts -   State or local governments are pretty similar to IRS debts in general.  You want to get that paid off so the government doesn't punish you.   I don't know how generous the terms are for state/local levels and they may vary drastically.
Buying stock on margin -

Debts to friends and family (maybe) - I list this one because sometimes borrowing money from friends and family can lead to very uncomfortable situations and strain the relationship.   You should do your best to pay back relatives and friends as soon as possible.   Even debts with fair terms between relatives that trust one another can end up harming the relationship if you fail to pay back the loans.   The amount of interest often doesn't impact this situation as much, its more the fact that you owe them money  and they are worried about getting it back.   But this situation varies based on the friends or relatives.  Some relatives and friends don't worry as much if they know they can trust you.  For example if your rich uncle loans you some money to go to college then they may not worry much if you don't pay them off right away.  But even there its not good to abuse the situation and you should make payments as required.  If you do borrow from people you know then make sure to sign a promissory note and pay them interest, that will help the situation.
401k loans -   I am not a hater of 401k loans, however they have disadvantages.  The key problem with a 401k loan is that usually if you lose your job you have to pay back the balance immediately.   If you can't do that they cash your 401k out and pay it off for you which then incurs taxes and a 10% penalty.  This is a real risk with a 401k loan and you should pay them down to avoid that happening. 

Higher interest debts: (over 7%) 
High Interest Credit cards - Typical credit card interest is in the 15-30% ballpark.   That is among the most expensive debt you can carry.   If you can't pay off a credit card then you may be able to do a balance transfer to get a good promotional rate on another card.



Paying down PMI on a mortgage - Usually the amount of PMI on a home loan is going to cost you effective interest rates that are in the ballpark of 10%.   That includes the interest on the mortgage itself plus the PMI.   You can figure it yourself by taking the (annual PMI cost ) /  (amount of equity your short of 20%) + mortgage % rate.
Higher interest student loans - Student loans follow you for life.   You can't get rid of them in bankruptcy (with rare exception).    Many student loans carry interest rates of 6.8% which is a relatively high rate but not excessively high.  But some student are higher and can exceed 10%.


Car loans - An auto loan isn't the worst kind of debt and worst case you can sell the car.  But on the other hand you generally don't want to lose your means of transportation.  Auto loans may have higher interest rates as well, and some of the worst ones are over 10%. I've occasionally heard of them hitting the 15-20% level.

Higher interest personal loans & peer-to-peer - You may be able to get a personal loan from a bank or credit union without collateral.   These are often better than credit cards or payday loans and the like, but still often carry fairly high interest.   My credit union offers rates around 8-12%.  In this day thats a very high interest rate.   You can also get personal loans from peer-2-peer lenders like Lending Club or Prosper.  I'd put those in a similar category.

Floating rate or promotional rate debts
Adjustible Rate Mortgages (ARM) - An adjustable rate mortgage may give you a very low current interest rate.   Amerisave says I can refinance my house to a 5 year ARM at just 2%.  Sounds great.  However when interest rates go up in the future that rate will climb.   That loan can go up 2% a year and could hit 7%.  If that happens your monthly payments could nearly double.    Its not easy to pay off a home mortgage for most of us given that this is usually a very large amount of money, but with a mortgage you usually have the option to refinance an ArM into a fixed rate loan.  Even if your house is under water and you owe more than its worth the governments HARP program can help you refinance to a reasonable fixed rate.
Home Equity Line of Credit or HELOC - A home equity line can be had for fairly cheap right now, assuming you can get one.   The rates are currently pretty low since they are tied to indexes like LIBOR or the prime.  For example my credit union offers loans as low as prime + 0.5% and that is about 3.75% right now.  But that credit line is variable and could go as high as 17%.
Temporary low interest promotional rates - You can often make purchases of furniture or other major home items with 0% deals.   These promotional rates carry a big 'gotcha' in their contracts.  If you do not pay off the debts in full before the end of the promotional period then they levy high back interest for the entire term.  Make sure to read the terms of any promotional deal and pay them off within the term to avoid any penalties.


Medium rate debts (5-7%)
Student loan debts - Depending on when you got your loans and the exact terms, it is possible to get student loans with relatively moderate interest rates.  These aren't a extremely high priority but certainly worth paying off to avoid the interest costs.   Plus as mentioned earlier you really can never get out of student loan debts so you should pay them off when you can.

Lower Priority debts

Rental / Business loans -  If you have debts versus collateral that is used for business purposes then that kind of debt is not generally as high a priority as loans against your personal property.   For example a mortgage on a rental is not as high priority as a loan on your own personal residence.   Worst case if you lose the rental you simply lose an investment property, but if you lose your primary residence then you may be homeless.     You should however of course try to pay down or refinance higher rate loans.   Today is a great time to refinance a rental property.   As long as your rental loans are low interest and you're cash flow positive then I see no reason to need to pay them off fast.


Low fixed rate debts (under 5%)

Personally I don't worry much about paying of low interest debt fast.   If you have a fixed loan and the interest is low then this is not a high priority to pay off fast.    If your debts are in the 5% or lower level and are fixed and have no other risks or problems then these should be your lowest priority of debt to repay.   In some cases I would not even worry about paying the debts off faster than the term of the loan.   For example with mortgages down as low as 3% level I see no need to pay those off fast.  Inflation will grow faster than that and in a few years you can probably get over 3% in various safe investments.

Keep in mind like I said above, this is pretty general in nature and theres always exceptions since everyones situation will be unique.
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MBA Forecast on Mortgage rates for 2013 & 2014

This is a short article but I wanted to capture this piece of data...   This article How much longer will mortgage rates stay low? quotes a forecast on mortgage rates for 2013 and 2014.

They say :

..., we checked the mortgage interest rate projections made by the Mortgage Bankers Association (MBA), the national organization representing the real estate finance industry....
According to the MBA, by the end of 2013, the interest rate on a 30-year fixed mortgage will be at 4.4 percent. And by the end of 2014, they see the rate at 4.6 percent.

Of course this is just their 'guess' really.   I don't know how much faith you can put in it. 

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Average Student Loan Debts 1989 to 2010

Over on FMF recently a commenter named Noah said he'd heard that the total amount of student loans went from $100B to $1 trillion from 1990 to 2012.    Sounds about right.

Part of that is inflation, part of it is due to more people going to college and part of it is from increased costs of college and finally lower state funding of financial aid impacts debt levels too.  It all adds up to increasing debt levels.

WE can get some specifics from the Survey of Consumer Finances which has data every 3 hears from 1989 to 2010.   I pulled the numbers out of the SCF 2010 data and compiled the chart below.

This is showing two things.  First is the left axis and the blue bars which is the average amount of debt among people who have loans.  Of course most families do not have student loans and those families are not considered in the average.    THe red line on the right axis is the percent of families who do have student loan debt.   So for example in 2010 only 19.2% of families had student loan debts and the average they carried was $25,600.  

Here is the data in table format as well:

	average	% families
1989	$5,400	8.9%
1992	$7,100	10.7%
1995	$8,000	11.9%
1998	$13,000	11.4%
2001	$13,700	11.8%
2004	$16,700	13.5%
2007	$21,500	15.2%
2010	$25,600	19.2%

Of course the numbers have gone up since 2010 but thats the latest data the SCF has compiled.

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Soapbox time : Say NO to Debtors Prisons

The other day I read this article : Jailed for $280 : The Return of Debtors Prisons.   I encourage you to read the article yourself.   

The short version of the story is that while its illegal to put someone in jail for failing to pay a debt there are however a lot of cases now where people are put in jail because they failed to pay a debt.    Of course that makes no sense at all, but its basically what happens.   The article shares a story of a woman who got a $280 medical bill in error and was told she didn't have to pay it.   Then fast forward and a debt collector has gotten the local sheriffs office to haul the woman off to jail.   Of course that makes no sense because debtors prisons are illegal in the U.S.

What is really happening is that courts are fining and imprisoning people for legal actions related to the debt rather than the debt itself.  So you aren't going to jail because you failed to pay the $280 bill but you do go to jail because you failed to appear in court for a court hearing related to the $280 bill.    In effect the debt collectors can use the power of the courts and threat of jail to get people to pay the bills.    The article says that in Illinois it can be common for debt collectors to use the threat of the courts and jails to pressure people who owe even small debts.

Part of me says this is fair and that if you don't show up for a court date or ignore a judge order then there should be criminal consequences for that.    But really we're talking about a totally civil issue here, not a criminal issue.   I don't think we should be using our jails to punish people for ignoring a past due $150 cable bill.  

 The article also discusses people in jail because they can't pay fines related to criminal charges.   Thats  a different matter than simply failing to pay a debt, but it can also be a big problem.   One study on the matter relays this example :

"We also profile Gregory White, a homeless man who was arrested for stealing $39 worth of food from a local grocery store. He was assessed $339 in fines and fees, which were later converted into a community service sentence after he was jailed because he could not pay his fines. Mr. White spent a total of 198 days in jail because he was unable to pay his LFOs and could not afford the bus fare to complete his community service. In all, his incarceration cost the City over $3,500."

The city spent $3500 to put someone in jail for 198 days because they stole $39 in food and then couldn't pay a $339 fine.   Of course theft is wrong and homeless or poor people should not steal.    But if a  homeless person steals food then fining them isn't a very logical punishment.  If he could afford food in the first place, presumably he wouldn't be stealing it and clearly he wouldn't have the money for such a fine.   I don't think they should just ignore such crimes but there has to be a better solution.

Whether its a unpaid bill or a criminal fine, I don't think it makes much sense to throw people in jail for unpaid bills.   Debtors prisons are illegal in the US and so people really shouldn't be jailed for debts.   Thats my opinion.

What do you think?   Should courts jail people for debts?   

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Private Student Loan Data - Some Students Should NOT be Using Private Loans

This study titled Who Borrows Private Loans   has various data on the demographics of private student loan borrowers.   Its from 2007 but new enough.  I pulled some data from the study to make the charts below.

First we look at whether or not private student loan borrowers have Stafford loans or not and if so if they maxed out their Stafford loans.

Almost a quarter of private student loan borrowers have NO Stafford loan.   Another 21% of private loan borrowers have Stafford loans but they didn't take out the max available.  Altogether there are 46% of students borrowing from private student loans who haven't borrowed as much as possible from Stafford loans.   All of these students should be maximizing the Stafford loans before getting a private student loan.   Not all students qualify for subsidized Stafford loans but even if you don't have financial need you can still get unsubsidized Stafford loans which are better terms than private loans.

Second here's a look at what type of university or college the private student loan borrowers attend.

As I would expect a large number of the students attend the generally more expensive private non-profit four year universities and the for profit universities.    However as you can see theres still a significant number of students going to both two and four year public schools who borrow private lenders.   

12% of private loan borrowers are attending public two year universities.   Its hard to see why someone going to a public 2 year university would really need private loans.   Community Colleges are generally rather cheap to attend and if you can't afford the cost of school then you would at least have money available from Stafford loans.   If Stafford loans or other financial aid aren't enough then you should be getting a part time job.

The study makes a couple points relevant to this topic:

"Almost 90 percent of private loan borrowers apply for other types of aid, and 64 percent receive some type of grant assistance."

"When students who do not meet the eligibility criteria for federal student loans are excluded, one out of five undergraduate private loan borrowers did not first take advantage of federal student loans. Half of these students did not file the necessary application for federal student loans."

10% of private student loan borrowers did NOT apply for other types of aid.   It seems to me that those 10% of students are likely missing out on some aid.   I would guess that some if not most of that 10% didn't apply for aid because they assumed they would not be eligible.    But as I pointed out before you can still get unsubsidized Stafford loans even if you don't have financial need.


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Should You Consolidate Your Student Loans?

Federal loan Consolidation

When you consolidate federal loans they give you a weighted average interest rate.    The interest rate doesn't change over all.   OK, actually they may round to the nearest 1/8 % but the rate won't change too much.    Its not like you can take your old loans at 6.8% and get a "great rate" like when you refinance a house.  

How does the weighted Average interest work?

Weighted average means you figure the average amount of something differently due to individual items having different weights.   For the student loans a loan with a higher balance would have more weighting than a loan with a small balance.   The general formula would be like this :

(Loan #1 balance * Loan #1 % rate) + (Loan #2 balance * Loan #2 %) ... + (Loan #n balance * loan n %)
-- divided by --
(Loan #1 balance + Loan #2 balance ... + Loan #n balance)

So for example lets say you have 3 loans :   Loan #1 is $5000 at 5%, Loan #2 is $1000 at 10% and Loan #3 is 6% at $3000.   You do NOT just average 5%, 10% and 6% and get 7%.    That 10% loan is only $1000 balance so it has much lower weighting than the other two loans.  The weighted average formula would work like this :
($5000 * 5% ) + ($1000 * 10%) + ($3000* 6%) / ($5000 + $1000 + $3000) =
250 + 100 + 180 / 9000 =
530 / 9000 =
.0588
=5.88%

The low interest 5% loan has a higher balance than the other two loans so it weights the average more.  Thats why your weighted average is closer to 5% than 6% or 10%.

You might look at this and think you must be getting a better deal.   I mean isn't a single 5.88% loan better than a 5%, 6% and 10% loan?     No, because the 5.88% is paid on a much larger balance than the 6% and 10% loans were.

You can verify that by figuring the straight interest rate you'd pay in a year for the 3 loans as a sum versus the 5.88% loan on $9000.

Individually you'd pay interest of :
5% of $5000 = $250
6% of $3000 = $180
10% of $1000 = $100
totaling = $530

After consolidation you'd pay :
5.88% of $9000 = $530

See?  Its the exact same interest in the end.   No wait I lied.   Remember that the interest rate may get rounded to the nearest 1/8 %.    Well 5.888% is going to round up to 6% so the actual rate with consolidation may get rounded up to 6% in this case.   That would give you a interest of 6% of $9000 or $540.  

Private Loan Consolidation

Consolidation of private loans is more like refinancing a debt.   You have to go to the lenders and see what kind of rate they will give you.    Consolidating can have the benefit of giving you one large loan that can be paid over longer period.   Your interest rate may even go down if your credit score is a lot more appealing now than it was in the past.   Private loan rates generally vary based on market interest rates.   You may pay something in the range of prime rate + 1% to prime rate + 6%. 


Who Can Consolidate?

If your loans are in payment and not in default then you can usually consolidate them.    Married couples can no longer combine their loans while consolidating.  Parents who have parental student loans can also get consolidation.

Benefits to Consolidate


There are several potential benefits to consolidation :

1) Longer repayment plans.    This I think is the biggest benefit of consolidation.   With consolidating you can pick alternate repayment plans with terms up to 30 years.    Normally the default repayment plan for a student loan is 10 years.   If you consolidate and go with a longer repayment plan this will give you a lower monthly payment.   This can be a good idea if you have a lot of loans and really struggle to make your payments.
2) Some lenders give bonus discounts on the loan.  0.25% interest rate deduction for using automatic payment is a common incentive.    You may also qualify for a 1% rate reduction if you make on time payments for 3 years straight.
3) Easier to deal with single loan.   Over several years in college you may have several loans with different lenders.   Consolidating will give you a single loan with a single payment.  Its just a little easier to deal with.

The #1 item is the major reason to consolidate.   #2 and #3 are minor details in comparison.

Should you consolidate?

Ok so should you?     Since you can't combine federal and private loans it boils down to two separate situations.  If you have federal loans you can consolidate them as a group or you can also consolidate private loans separately as a group.    In either case you may want to consolidate in order to extend the repayment period and get a lower monthly payment.    This is an OK option if you have large loans and its hard for you to make the payments with the normal 10 year term. For private loans the question also depends on if you can get an interest rate deduction.  If you can drop the rate considerably then consolidating a private loan can be well worth your while.

Why you shouldn't consolidate = More Interest

If you can make your payments without much difficulty then there generally isn't a good reason to consolidate federal loans.   Extending your repayment period will increase the total interest you pay.   You're better off just paying them with the normal 10 year term.   Same goes for private loans however if you can get a lower interest rate with a private loan then that could make consolidation worth while in any case.

Income Based Repayment Could be a Better option

The major reason to consolidate is to extend the repayment term with the objective of getting lower payments.   If you have large loans and difficulty paying them then you may be eligible for Income Based Repayment IBR for the federal loans.  

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